Why might third-quarter earnings be the low point for the year?

  • Goldman Sachs expects Xiaomi’s revenue in the third quarter of 2026 to be 107 billion renminbi, down 6% year over year; adjusted net profit is forecast at 4.9 billion renminbi, down 57% year over year and 22% quarter over quarter, a low for the year.
  • Excluding autos, AI and other new businesses, Goldman Sachs expects third-quarter adjusted net profit of 7.4 billion renminbi, down 27% year over year and 12% quarter over quarter, indicating that traditional businesses are also facing profit pressures.
  • Goldman Sachs cut its forecasts for group revenue in 2026–2028 by 0%–8%, and its adjusted net profit forecasts by 6%–16%, mainly because of lower auto revenue expectations. Its forecasts for adjusted net profit over the three years are 22.6 billion, 26.5 billion and 34.4 billion renminbi, respectively, below Visible Alpha’s market consensus by 4%, 14% and 16%.

Can higher phone prices offset declining shipments?

  • According to Omdia, Xiaomi shipped 30.7 million phones in the third quarter, down 29% year over year; its global shipment share was 12%, up 1 percentage point quarter over quarter but down 1.6 percentage points year over year.
  • New product launches and higher prices for existing models supported average selling prices. Goldman Sachs expects the average selling price of phones in the third quarter to be about 1500 yuan, up 39% year over year and 10% quarter over quarter; gross margin is forecast at 8.8%, up 25 basis points quarter over quarter. Even so, the firm still expects the phone business to post annual operating losses of 2 billion–3 billion yuan in 2026–2027.
  • Cost pressures are also easing: TrendForce expects average contract prices for mobile DRAM to rise 0%–5% quarter over quarter in the fourth quarter, below the 8%–13% increase in the third quarter; the expected increase for NAND is set to fall from 20% to 15%–20%. Goldman Sachs believes Xiaomi may once again place greater emphasis on shipment volume as memory costs stabilize or decline.

Why are earnings expectations being cut despite growth in auto deliveries?

  • Xiaomi delivered more than 50 thousand vehicles in October, and orders for SkyNomad remained stable after its initial sales period. Goldman Sachs is therefore more confident in management’s delivery target of about 450 thousand vehicles for 2026, and expects full-year deliveries of 445 thousand vehicles.
  • Goldman Sachs expects the SkyNomad order mix to support stable or slightly higher gross margins for smart electric vehicles in the second half of 2026; however, AI investment will weigh on gross margins for the combined autos, AI and other new businesses. The firm expects this combined business to continue recording a non-GAAP net loss in 2026–2028.
  • Looking ahead to 2027, auto growth depends on domestic demand, new models, costs and overseas expansion. Goldman Sachs expects lower battery costs to offset some of the increase in memory costs, and forecasts overseas deliveries of 10 thousand vehicles in the second half of 2027; meanwhile, growth in auto R&D expenses will be more tightly controlled, while sales and administrative expense growth will accelerate.

What has changed in the outlook for other businesses and valuation?

  • Weak domestic consumption is slowing the recovery in AIoT revenue. Even with a lower comparison base and healthy overseas growth, Goldman Sachs still expects revenue to fall 3% year over year in the third quarter and rise 8% in the fourth quarter, slightly below its previous forecasts.
  • Fewer phone shipments are also affecting internet services: lower revenue from pre-installed advertising could weigh on third-quarter gross margin, which Goldman Sachs expects to be 73.3%. If phone shipments recover as costs stabilize, higher-margin advertising revenue could receive support.
  • Goldman Sachs expects Xiaomi’s AI investment to increase from about 16 billion yuan in 2026 to more than 20 billion yuan in 2027. The firm maintains its Buy rating but cut its 12-month target price from 39 Hong Kong dollars to 35 Hong Kong dollars; it believes the share price could rise over the medium term if the downward revision cycle for earnings-per-share forecasts bottoms out and the business outlook improves.